Security Transaction Tax

The Securities Transaction Tax (STT) is a type of direct tax levied in India on the purchase and sale of securities that are listed on recognised stock exchanges. Introduced to ensure transparency and ease in tax collection, STT is charged at the time of transaction and collected by the stock exchanges on behalf of the Government of India. It applies to equity shares, derivatives, equity-oriented mutual funds, and similar market instruments, making it an important component of India’s financial taxation framework.

Background and Introduction

The Securities Transaction Tax was introduced in 2004 through the Finance (No. 2) Act, 2004, and came into effect from 1 October 2004. It was implemented with the objective of streamlining taxation on securities transactions and reducing tax evasion that occurred under the earlier capital gains system.
Prior to the introduction of STT, taxation of stock market transactions depended on self-declaration and record maintenance by investors, making it prone to manipulation. To simplify and formalise the process, the government decided to collect a small, uniform tax directly at the point of trade through recognised stock exchanges.
The STT regime has since evolved through various amendments to reflect market developments and maintain tax efficiency while promoting long-term investment.

Legal Framework and Administration

STT is governed by Chapter VII of the Finance (No. 2) Act, 2004, and the relevant rules framed thereunder. The tax is collected by the recognised stock exchanges and prescribed mutual fund organisations, which are responsible for remitting the proceeds to the Central Government.
The administration of STT falls under the purview of the Central Board of Direct Taxes (CBDT), which is part of the Department of Revenue, Ministry of Finance. The mechanism ensures automatic tax deduction at the transaction point, eliminating the need for post-trade assessment or separate filings by investors.

Scope and Applicability

STT is applicable to transactions involving taxable securities carried out through a recognised stock exchange in India. The term “securities” includes:

• Equity shares of companies.
• Equity-oriented mutual fund units.
• Derivatives (futures and options).
• Equity-linked debentures and similar instruments.

However, STT does not apply to:

• Off-market transactions (i.e., private transfers not executed on exchanges).
• Transactions in debt instruments such as bonds or debentures not linked to equity.
• Commodity trading or currency derivatives.

The liability to pay STT depends on the type of transaction (purchase or sale) and the nature of the security involved.

STT Rates and Structure

The rates of Securities Transaction Tax vary according to the type of security and the nature of the transaction. The rates have undergone multiple revisions over time. The commonly applicable rates (as per the latest notified structure) are summarised below:

These rates are periodically reviewed by the government based on market conditions and revenue considerations.

Collection and Payment Mechanism

The stock exchange or mutual fund authority acts as a collecting agent for STT. The process typically involves:

1. Automatic deduction: STT is deducted at the time of transaction execution on the exchange.
2. Collection by exchange: The exchange collects the total STT for the day from all transactions.
3. Deposit with the government: The collected amount is remitted to the Central Government within the prescribed period.
4. Reporting: Exchanges and fund houses file periodic returns detailing the STT collected and remitted.

For the investor, STT appears as a separate charge in the contract note issued by the broker or trading platform, ensuring transparency.

Treatment under Income Tax

The Securities Transaction Tax has direct implications for income tax calculation, especially in determining capital gains from securities transactions.

• Short-Term Capital Gains (STCG): Profits from the sale of listed equity shares or equity-oriented mutual funds held for less than one year are taxed at 15%, provided STT has been paid on the transaction.
• Long-Term Capital Gains (LTCG): Earlier, long-term capital gains (holding period exceeding one year) from equity transactions were exempt under Section 10(38) of the Income Tax Act if STT was paid. However, from 1 April 2018, LTCG exceeding ₹1 lakh per financial year is taxed at 10% (without indexation benefit) under Section 112A, provided STT has been paid on both purchase and sale.

Thus, payment of STT remains a prerequisite for availing concessional tax treatment on capital gains.

Objectives and Advantages

The introduction of STT served several policy objectives, including:

• Simplification of tax collection: Eliminated the need for assessing each transaction individually.
• Reduction in tax evasion: Since the tax is deducted at the point of transaction, under-reporting of gains is minimised.
• Transparency: Every transaction is traceable through the exchange’s records.
• Ease of compliance: Investors are not required to file separate returns for STT.
• Stable revenue source: Provides consistent tax income for the government even during market fluctuations.

Challenges and Criticism

Despite its advantages, STT has attracted certain criticisms from market participants:

• Increased transaction cost: The tax adds to overall trading expenses, especially for high-frequency traders.
• Impact on liquidity: Higher costs can discourage day trading and reduce market liquidity.
• Double taxation concerns: Some critics argue that capital gains tax and STT together amount to dual taxation on the same income.
• Limited applicability: As STT applies only to exchange-traded securities, it does not capture large volumes of off-market or private transactions.
• Effect on derivative trading: Even though the rate is lower, frequent traders in derivatives view it as an additional burden.

Despite these concerns, policymakers have retained STT as it provides a secure, non-evasive, and transparent tax mechanism.

Comparison with Other Countries

India was among the first emerging economies to introduce a broad-based securities transaction tax. Similar levies exist in other countries, though under different names and structures:

• United Kingdom: Stamp Duty Reserve Tax (SDRT) on share transfers.
• France and Italy: Financial Transaction Tax on specific securities.
• Singapore and Hong Kong: No such tax, to promote market competitiveness.

Compared to these, India’s STT rates are relatively modest and designed to balance revenue generation with market efficiency.

Role in Market Regulation

Apart from being a fiscal measure, STT also contributes to the formalisation and regulation of the capital market. Since the tax is collected through recognised exchanges, it encourages transparent trading practices and discourages off-exchange transactions.
It also aids in curbing speculative activities and ensuring that investors engage in legitimate, traceable trading operations.

Recent Developments

The government periodically reviews STT rates to align them with market conditions. In the Union Budget 2023–24, the rates on derivatives were slightly revised to enhance revenue collection. With the growing popularity of retail trading, mutual funds, and equity investment, STT continues to be a significant contributor to the government’s direct tax revenue.
The increasing digitisation of securities markets through platforms like NSE, BSE, and depository systems (NSDL, CDSL) has further improved compliance and efficiency in STT collection.